P2P May Not Reduce Interchange: UK Expert

The news that CO-OP Financial Services and FIS are going to integrate and expand their Sprig and PayNet systems into a real time person-to-person payment network will mean different things to different network users, a payment expert said.

The move will elevate as many as 48 million U.S. consumers to a level of banking that has been enjoyed in the rest of the world for decades, said Gareth Lodge, a U.K based senior analyst for payments for Celent, an international banking consultant firm. And, he added, the deal will challenge all participants in the U.S. payment system with a new way of operating.

“People in the U.S. don't realize it, but people in the U.K and other parts of the European Union have been able to send money back and forth for little or no cost for about 30 years,” he said.

“So in one sense it will mean U.S. consumers start joining other consumers in the rest of the world, but in the other sense it's going to mean the U.S. payment system starts to change for everybody – whether they are ready or not.”

Lodge observed that the deal as announced does not include the ability for consumers to use the new service to make payments to merchant accounts, in part because neither firm wanted to undercut the participants' card interchange.

But he predicted this restriction would not last long.

“FIS and CO-OP are fortunate because they are each closed systems, so to speak,” Lodge said. “The transactions run over their own rails, so they get to establish the rules and terms. But if they want to expand further, that will not be possible, and they are going to have to deal with the merchant question at some point.”

Lodge contended that instead of focusing on protecting what they already have in card interchange, each network would be better served by focusing on what they will gain from a sharply different payment system.

For example, he said, other nations that launched person to person payment systems found that the number of transactions overall increased, and the only channels that saw declines in activity were cash and checks.

“Where did people use the person-to-person systems most?” Lodge asked. “It was to send their kids money at college, or pay family members for some part of a joint gift, or to pay a neighbor or friend for something. It wasn't to make a payment they would otherwise use a card to make. Card payments generally did not decrease,” he added.

But all markets are different and Lodge observed that other nations didn't see as much of a decline in their wired money services like Western Union as the U.S. will probably see. “But that's just one more place where money spent on one part of the payment system could move back to the financial institution,” he said.

He also noted that while person-to-person payments, including those to merchants, didn't make as much on a per-transaction basis as card transactions, they didn't lose money. And, given their increased volume, the revenue could be significant.

The challenge, Lodge said, is not only to recognize that a new technology is disrupting old ways of doing business, but to start thinking about the opportunities such disruption represents.

“There is a real delicate balancing act at play for every bank and credit union,” Lodge said, “between not wanting to cut existing income too much, but also not wanting to stifle any of the benefits and opportunities the new technology will bring.”

For example, consider what person-to-person payments do for consumer loyalty, he said.

“If accounts with direct deposit are already sticky, how much more sticky will they become if they are the places where your friends and family know to send you money when they owe it to you? And what will that mean for additional cross selling opportunities?” he added.